Ahead of Saturday’s Republican primary in South Carolina, rivals to Mitt Romney, the race’s frontrunner, demanded that he release his tax returns, something that the former Massachusetts governor finally on Tuesday agreed to do.

Mr Romney’s wealth and the industry in which he made his fortune, private equity, have been thrust into the cauldron of presidential politics by both critics on the left, insisting that the wealthy pay higher taxes, and Republican rivals on the right.

Yet there is more at stake in the debate than just Mr Romney’s candidacy. The private equity industry – which has long enjoyed favourable tax treatment – finds itself uncomfortably in the political headlights in a way that could upend the sector’s pay structure.

Private equity is under particular fire because some of the profits earned by industry executives – known as “carried interest” – are taxed at the 15 per cent capital gains rate, rather than as normal income, for which the top marginal rate is 35 per cent.

Changes in the US tax code over the past decade have delivered private equity executives a huge windfall. In 1986, the top rate on both capital gains and income was 28 per cent. But in the 1990s, marginal income tax rates went up, while the rate of capital gains on investments lasting more than a year was cut under Bill Clinton as president and then again by George W. Bush to the current low rate.

Even though Mr Bush also cut income tax rates, there is still a wide gap that favours the wealthy, who derive a larger proportion of their remuneration from investment income.

The tide now appears to be turning against private equity, both in the White House and among some wealthy business leaders, who also object to the way big private equity firms, managing billions of dollars, continue to benefit from the tax break.

Rupert Murdoch recently told his Twitter followers that he “can understand [Occupy Wall Street’s] resentment of extreme inequalities, but how about fund managers only paying cap gains tax without risking a penny?”.

In private, some private equity partners admit that a tax policy designed to encourage entrepreneurship, but now worth billions in personal income, is indefensible. Yet these executives said they will not speak out, for fear of becoming industry pariahs.

“If the partners are adding value, then payment for that value added you would think is income,” says Eric Toder of the Urban Tax Policy Institute, who compares carried interest to stock options granted to corporate executives, which are treated as part of pay.

The principle behind carried interest is that a partner commits their time and reputation to the partnership for an uncertain reward. So a share of the profits is akin to the risk an entrepreneur takes when starting a business. In the case of private equity, a manager may commit to running the fund for up to a decade.

“There is a risk-taking aspect to this business that is important to understand and is important to incentivise,” says Steve Judge, interim head of the Private Equity Growth Capital Council.

Yet private equity has resisted any change to the status quo – most recently in 2010, when the House of Representatives passed reforms that failed to gain approval in the Senate.

That year, Stephen Schwarzman, a fundraiser for Mr Romney and a billionaire co-founder of Blackstone, compared the US government’s attempt to increase the amount of tax paid by the partners of financial firms to Hitler’s invasion of Poland in 1939. Mr Schwarzman apologised for the analogy, made privately to the board of a non-profit group.

For now, many in an industry used to operating out of the public eye simply hope to weather the storm of publicity until the election is over.

One private equity executive speculated that “carried interest benefit would have disappeared a long time ago” if the president had not attempted last year to also introduce a new measure, the enterprise value tax, which would force fund managers to treat profits from the sale of their business as income.

He points to the tax question as one bargaining chip in what ultimately will be a fierce battle to reshape the tax system, saying, “The only way that carry will be addressed is in the context of a grand scheme of tax reform.”

The White House budget proposal, due early next month, is expected to press for the measure again this year. So far, the Republican presidential candidates, led by Mr Romney, have committed to maintaining the special treatment of carried interest.